30 Days Towards Sustainability
Day 11: Be wary of debt!
Sustainability includes security, but the essence of debt is insecurity. The word "mortgage" is derived from the Latin words for "Death Grip". As long as you have sufficient income, you can afford debt payments. But what happens if you lose your income? During the Great Depression, many people lost everything they owned - houses, farms, equipment, livestock - to foreclosures, and this helped drive the centralization of wealth, which is always an unsustainable situation for a society.
I think the prudent approach is to be very wary of debt. Sure there are financial reasons for this, but more important is the fact that debt is the gateway to over-consumption. If you stick within the budget possible with your income, you will place an external limit on your consumption. And for most of us, "external limits on consumption" are a very good idea.
One driver of environmental devastation is the practice of financing frivolous consumption with credit cards and household equity. More debt leads to more consumption which leads to more production which leads to more consumption of resources and energy and that leads to more environmental devastation. Often the cycle goes: credit cards are maxed to the limit, so a lower interest (lower than the credit card rate, that is) home equity loan is taken out to pay off the credit cards. Then the credit cards are maxed out again, which sends the borrower back to the bank. If property values are rising, then more equity is drained to pay off the credit cards. All too often, the vicious cycle of borrowing and consumption continues. This is the story of the modern American economy, and that is a serious concern for the planet.
Our grandparents' advice on debt remains true in our own time, however quaint it may sound. Borrow only for critical purposes - the purchase/construction of a house and land, education, to establish an income-producing business, or to finance an "extreme green renovation" of your house or business that leads to lower energy/water bills and less household impact on the environment. Borrow as little as possible and pay off the loans as quickly as possible.
Making extra principle payments on a loan can save you lots of money. Plus, it helps you keep your money in the local economy, instead of sending it off to strengthen trans-national financial corporations.
For example, the payments on a 30 year, fixed rate, 8% mortgage with a beginning balance of $100,000 are $733.76 per month. Over the course of that loan, the borrower will pay $264,153. Total interest paid is $164,153. If you make an additional principal payment each month of only $50, the total amount paid is reduced to $209,948. The loan is paid in 24 years rather than 30. You don't pay $39,905. To do this, you pay an additional $14,300 during the 24 years over and above your mortgage payment, at the rate of $50 each month. Your return on your $14,300 investment is 11.63%, per year, guaranteed, tax free. If you pay $100/extra per month, your return on your 20 year investment is 12.94% per year, guaranteed, tax free. If you pay $150 extra/month, your return on your 17.5 year investment is 13.98% per year, guaranteed, tax free.
Many mortgages are sold by the originating banks to financial institutions in other states, so interest payments go out of state and don't do much for the local economy. So besides avoiding or minimizing debt, try to borrow from local financial institutions (such as credit unions) that do not sell their loans out of the state.
Some people object to paying off mortgages "because then you lose the tax deduction for the mortgage interest." The tax deduction for mortgage interest is useful, but it is not a reason to not pay your mortgage off early. The household will be better off without the mortgage payment even if they lose the mortgage interest deduction.
Minimizing or eliminating your debt can also make it possible for your household to live on less income. If you don't have to work as hard to earn money to pay debts, you can have more time for family and household and community activities, and that generally will always be a good thing for household and community sustainability.
Bob Waldrop, Oklahoma City
These tips may be freely forwarded, credit for authorship is appreciated. They are posted online at http://www.energyconservationinfo.org/30days.htm .